4 Top Direct Spend Reduction Opportunities for 2018

Two years ago, Microsoft was forced to re-evaluate the components and capabilities of the Xbox One S to compete with the high quality and lower costs of Sony’s PlayStation 4. Although Microsoft met the quality challenges with the Xbox One S compared to the previous model, the Xbox One, component costs increased by $24. The broader opportunity is how to meet quality and sales goals while driving cost reduction, especially given component prices generally trend down and components make up approximately 96% of the cost of an Xbox One S.

High Tech companies, like Microsoft, not only need to manage direct spend better to cope with competitive pressure, but also need to secure margins and accelerate time-to-volume. Subsequently, this requires focus on component prices but also lead times, quality, availability and supply risks such as component obsolescence. To balance these competing factors, companies need intelligent insight to aid in making the best sourcing and procurement decisions. An intelligent enterprise is enabled by IT systems which allow business processes to be data-driven, eliminating manual efforts while increasing efficiency. A supply chain enabled by the intelligent enterprise ensures timely data gathering, streamlined negotiation processes, intelligent negotiation targets, and ultimately better business award decisions with suppliers.

Opportunity 1: Delivering Timely Decision Support Data

The supply base manager business user is frequently challenged to find the most insightful and relevant data to be leveraged for their negotiations and award decision making. Oftentimes, this data is scattered across multiple groups and multiple data sources, is not accurate or current, and is not available when needed. This time-consuming task has a cost impact, and even more importantly limits the effectiveness of the supply base manager. However, automating this task with intelligent data capture enables the right data to be delivered to the fingertips of the supply base manager at the right time and in-context of their business process.

Opportunity 2: Streamlining Negotiation Processes

Another costly aspect of traditional sourcing is ineffective collaboration with suppliers. During negotiations, supply base managers often finds themselves in linear communication with suppliers. At the same time, suppliers have poor visibility into negotiations and other sourcing activities. But an intelligent solution that includes a negotiation board, accessible to both the supply base manager and their suppliers, can improve communication while streamlining the negotiation process. This level of transparency is powerful because it encourages trust and deepens the supplier relationship. As supplier quotes are received, a supply base manager can negotiate quotes and lead times, while the negotiation board updates their changes, all in real-time. Additionally, the negotiation board shows vital information such as simulation scenario results and key performance indicators. A supply base manager can now evaluate performance against targets from one central location. This single source of truth enables supply base managers to make adjustments to meet targets, at any time. Overall, negotiations are streamlined while transparency is increased.

Opportunity 3: Setting Intelligent Negotiation Targets

Meeting aggressive savings goals through efficient price setting can be made easier by the use of predictive analytics. Currently, most target pricing for negotiations are set at a macro level without knowing if or how they are achievable. Getting the right pricing data to analyze and having the right tools to do the analysis can be complex, and especially challenging from a global perspective. However, an intelligent enterprise eliminates the guesswork and enables more granular bottom-up target setting. In addition, combining market price benchmark data with predictive algorithms based on negotiation history further improves target price setting. In this way, a business can use more dependable targets to improve negotiation outcomes.

Opportunity 4: Making Better Award Decisions

Sourcing professionals traditionally spend a copious amount of time manually comparing supplier capacity, capabilities, and prices—often across regions and lines of business. This can be very complex without the proper analytical tools, but the power of optimization and simulation can completely transform this process. Rules-driven optimization algorithms recommend a starting point, while what-if simulations help to tweak recommendations to make final decisions. Supplier awards and allocation scenarios can now be evaluated before commitment.

Today, the demands of innovation and complexities of sourcing require a more sophisticated approach to sourcing and procurement decision-making. SAP Supply Base Optimization is a new tool that helps with this complex decision process and enables the intelligent enterprise. It is interesting to take the time to think about how innovative tools, like SAP Supply Base Optimization, can impact component costs and quality to ultimately improve outcomes and influence the competitive landscape.